Prieur’s readings (May 11, 2010)

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This post provides links to some interesting articles I have read over the past few days that you may also enjoy.

• Scott Lanman and Caroline Salas (Bloomberg): Fed hinting on mortgage-bond sales brings Bernanke tightening, May 10, 2010.
Words may speak louder than actions for Federal Reserve Chairman Ben Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet. Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan.

• Andy Kessler (The Wall Street Journal): The markets have good reasons to be nervous, May 8, 2010.
Nathan Rothschild famously quipped, “Buy when there is blood in the streets,” but he never said anything about firebombs thrown at Greek riot police, a trillion dollar easing of the money supply, or synthetic collateral debt obligations. Is Europe really a problem for the U.S.? Is this a buy signal – or is it more like the bank run of the last two years morphing into a run on debt-laden countries?

• Jeff Opdyke, Jane Kim, Eleanor Laise and Laura Saunders (The Wall Street Journal): Playing the market plunge, May 8, 2010.
Lest anyone had thought the rally of the past 14 months had restored calm to the stock market, Thursday’s trading action was a reminder that the investing game is as dicey as ever. “People had been thinking, ‘Oh, that [global financial crisis] thing; I’m glad that’s over,’ and we’re back to the races again,” says Rob Arnott, chairman of Research Affiliates, a Newport Beach, investment firm. “But when expectations are that everything is fine again, a bolt from the blue can come from anywhere to send this market lower very quickly.”

• Wolfgang Münchau (Financial Times): EU buys itself time, May 10, 2010.
In the end, there was no choice. Faced with an existential threat, the European Union has demonstrated that it can act fast if necessary. European leaders deserve respect for finally getting ahead of the situation. That said, we should also realise that by throwing money at the problem, mostly in the form of backstop guarantees, the EU has merely bought itself time to sort out the eurozone’s governance mess. The real test is yet to come.

• Wolfgang Münchau (Financial Times): Germany pays for Merkel’s miscalculations, May 10, 2010.
This was an expensive weekend for Angela Merkel, financially and politically. For months she had basked in her image as Germany’s new Iron Chancellor – “Madame Non”, as the French press had come to call her. She enjoyed the adulation of the fiscally righteous in her own party. She fell ominously silent when anti-Greek xenophobia broke out across Germany. It was all a big bluff, a giant political miscalculation, costing the eurozone a cool €750bn.

• Philip Stephens (Financial Times): Britain too has to convince the markets, May 10, 2010.
This is no time for Brits to sound smug about the troubles faced by their European cousins. The government that eventually emerges from last week’s inconclusive general election is about to receive a terse warning from the Treasury. It runs roughly as follows: you knew before polling day that the public finances were in a truly dire state, even if you neglected to own up to the voters; well, the news now is worse. If you want to stick to your promises on reducing the deficit you may have to find another £15bn or £20bn in spending cuts or tax increases over and above any previous calculations.

• Scott Lanman and Caroline Salas (Bloomberg): Fed hinting on mortgage-bond sales brings Bernanke tightening, May 10, 2010.
Words may speak louder than actions for Federal Reserve Chairman Ben Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet. Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan.

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